A Better Way to Rescue MSMEs from the Tyranny of Threshold

Context: MSMEs Reforms announced as a part of the fiscal stimulus package are insufficient in accelerating the growth of the MSME sector.

MSMEs Reforms 

• Change in definition of MSME to include sales turnover criterion in addition to earlier investment criteria to determine their status.
• Distinction between manufacturing and service enterprises is abolished. 
• Increased investment and sales turnover thresholds for medium enterprises.

Reforms in MSMEs are Growth Decelerating

• If a micro-enterprise exceeds any of the criteria (investment limit or the sales turnover limit) it will be deprived of micro status as per the new definition, as it is not possible to increase the turnover without increasing investment.

• As a result, low Turnover to Investment Ratio (TIR) of manufacturing units and high TIR of services enterprises stand a slightly better chance of achieving growth without losing the concessions that accrue to them based on their micro or small or medium status. 

MSME Classification in Developed Countries

• Adopt either employment criteria or sales turnover criteria, or both. 

• European Union: a mix of sales turnover and employment criteria.
• The United States: employment yardstick.
• Japan: investment and employment criteria.

• Other countries have different ratios for different industries and assorted purposes.

Way Forward 

• Allow enterprises to remain MSMEs even if only one of the two criteria is met (like Japan).
• Principle to follow when we opt for a simple definition is to make it broad enough to subsume finer distinctions so that the purpose is not lost.
• Encourage MSMEs to grow, generate employment and be more productive by investing in technology without their fearing a loss of tax concessions consistent with their status. 
• Enterprise with higher investment and sales turnover than defined should be removed out of the MSME framework entirely in the case of medium enterprises.

Conclusion: Policy changes on MSME classification seek to end the tyranny of thresholds and develop attitude not to rewarding their growth rather than punishing.